2016 was a
volatile year for the global economy and the world’s financial markets. The
year began with the markets and the economy drowning in pessimism, but ended
with consumer confidence at a 15 year high and the DJIA knocking on the door of
20,000. One might say that investors
have blind optimism in pushing the DJIA to all-time highs given the fact that
significant obstacles remain in the path of our economy. Mr. Trump is likely a big part of the reason
for this optimism. His campaign
identified and shouted from the mountaintop the problems that have handcuffed
the globe’s economic superpower for the last decade.

Whether Mr. Trump can seek
and destroy these obstacles and clear the path for America’s economy remains to
be seen. Nonetheless, investors seem excited about his plans despite no
improvement in the earnings recession that has gripped America for the last two
years.

Domestic US
stocks moved higher in 2016 with the S&P 500 gaining over 11% for the year
and close to 4% in the last quarter.
Leadership in the equity market changed after the election. Growth stocks carried the baton during the
first through third quarters of 2016 and then handed the baton to value stocks
after the election. Defense, aerospace,
industrial giants, energy, and bank stocks, that had performed poorly for the
last few years quickly came to the top in the last few months of 2016 as leadership
in growth stocks paused as investors weighed Mr. Trump’s plans to renegotiate
trade deals with Asia and end the theft of US technologies in China. Foreign markets sold off as a result of these
statements and emerging markets fell 5% or more in the fourth quarter (EEM
-5.4%).

Mr. Trump’s
plans for cutting corporate taxes caused a significant selloff in the bond
market. Treasuries and investment-grade corporate bonds performed poorly in the
fourth quarter. Long treasuries dropped
over 12% in the fourth quarter (TLT -12.6%). Gold likewise plunged 13% in Q4
along with other commodities. The rise
in interest rates was not greeted well by real estate investors and REITs fell 3%
to 10% in the fourth quarter. US Stocks were the sole asset class that
performed well in 2016 and as a result diversified portfolios had only modest
gains for the quarter and the year. Volatility also chipped away at performance
as nervous investors braced the storms that occurred in February as the economy
threatened to fall back into recession.

2016 was
marked by modest but steady growth in consumption. Retail sales rose over 3% led by strong
demand for consumer durable products.
Demand for financial services continued to improve and the banking
sector is finally showing modest growth. Demand for healthcare remains at
all-time highs with strong growth in pricing.
Consumer confidence as measured by the conference Board rose to 113.7, a
level not seen since 2002. Most of this
rise came after the election. Corporate
investment remained flat to lower as corporate America seemed content with its
capacity given only modest growth in trends with consumer spending.

Global debt
remains the primary obstacle to strong economic growth and is compounded by poor
political policy and a regulatory environment that is burdensome and
ineffective. The size of government is
far too large and the cost of supporting it is a burden on American consumers
and corporations.

Inflation
remains benign despite the US economy now at or near full employment. Central bank policy continues to be
accommodative but is gradually turning toward neutral. The Fed has now raised rates twice as it
works to bring policy back to normal.

Washington
policy remains the wildcard with much still unknown about Mr. Trump’s plans.
Trump has talked a good story but can he deliver? America needs better trade
deals, better protection of its products in the global markets, and objective
leadership. These problems are not new and we have not had a president in
decades willing to take on this sort of challenge. Mr. Trump seems serious about his plans for
significant change and is surrounding himself with a cabinet of accomplished business
people to help him achieve his goals.

Historically,
Washington has not had much impact on the economy due to politicians inability
to increase confidence. The White
House’s biggest hammer lies in its ability to foster confidence so Americans
will spend and consume. The President
along with the Congress can also be effective by creating a fertile environment
for economic growth. This means
favorable trade deals and just the right amount of regulation for fair
competition.

The markets will
likely move higher as Mr. Trump continues his plan of change.